Know Your Debtors Before Giving Them Credit

Author: Williamson Accounting |

Blog by Williamson Accounting

Do you routinely extend credits to your customers? If so, this makes you a lender. In this case, you and your staff authorizing credit should become experts at judging credit relationships before you perform services or ship goods.

There are risks associated with every type of payment terms, even if the customer pays upon delivery. Until the delivery is made, and you have received full payment, your company is lending customers time, cash, equipment, personnel and resources. If you do not receive payment, or they refuse delivery, you are not only out of your product costs, but time and resources that could have been used elsewhere.

In order to set up a positive credit relationship, it is beneficial to set up guidelines that you and your employees use before they allow customers to buy on credit.

Here are 10 levels of investigation you and your employees can follow when deciding whether to offer credit to a customer or not. Keep in mind, even if you do not follow all 10, the more you verify a customer, the lower your risk.

  • Obtained and verified all contact information. 
  • Reviewed the customer’s credit history from a credit reporting agency
  • Ensure the customer has a good credit history with your company
  • Verify credit references with other companies
  • Know the customer well enough to judge character
  • Understand the forecasts for the customer’s industry
  • Forecast the customer’s financial condition, stressing cash flow.
  • The terms the customer wants are clear
  • Considered the size of the customer’s potential credit
  • Ensure the customer pays some cash up front, such as a deposit at the time of order or delivery.

One thing to keep in mind, don’t set your standards in concrete. Allow employees some flexibility, but do not allow them to deviate away from the guidelines too much or too often, especially when evaluating new customers.

Once you start extending credit, it is a good idea to get an annual update of each customer’s credit history. This will help you identify patterns or increase in potential risks.

The last thing to keep in mind when issuing credit is that you are developing a relationship with a customer. If you accurately assess the credibility before you agree to issue credit, the relationship has a good chance of running smoothly, giving your balance sheet a better chance at staying balanced.